What Will States Do If Federal Dollars Stop Flowing?

With Congress continuing to struggle to reach a deal to raise the nation’s debt ceiling before the Aug. 2 deadline, speculation abounds about what might happen if the federal government goes into default. Many of the questions have to do with health care spending. The bottom line: It’s a climate of uncertainty. Gail Wilensky, who ran Medicare and Medicaid during the George H.W. Bush administration told Politico last week, “we’ve never been through anything like this” (Feder, 7/21).

With very little specific information to go on, news outlets report that state governments, in many respects, are bracing for the worst-case scenarios.

In Michigan, according to The Detroit News, where the state draws an “average of $400 million in federal funds each week,” the concern is clear. A spokeman for the Department of Technology, Management and Budget said: “‘Until the U.S. Treasury lets us know what they’re going to do, we really don’t know the impact. … There are too many what-ifs,” and “it’s been very, very hard for us to do any kind of contingency planning’” (Egan, 7/28).

Meanwhile, NECN in Massachusetts reports optimism that the bay state will be ready if federal payments stop. “’We are in a far better position than most states thankfully because our tax revenues were much better than expected,’ said Massachusetts Treasurer Steve Grossman. … ‘We put together a solid plan that allows Massachusetts to pay all of its bills for the entire month of August, into September, and I would be hopeful … that the crisis would be resolved,’ said Grossman” (Yount, 7/28).

Similarly, Hawaii appears ready, according to the Star-Advertiser. “[Gov. Neil ] Abercrombie said the state’s contingency plan aims to avoid interruptions to programs that depend heavily on federal funding. Budget Director Kalbert Young described the plan as a ‘cash conservation’ strategy that would cover federally funded state programs in the short term” (Reyes, 7/29).

In general, state officials seem to be aching for more information to prepare for a stoppage federal checks.

Businessweek offered this take from Maryland Gov. Martin O’Malley, a Democrat: “As for backup plans in case of default, O’Malley said states still don’t know what checks might be withheld from the federal government. ‘So it’s not possible at this point for us to make contingency plans like that,’ O’Malley said” (Witte, 7/28).

And the Atlanta Journal Constitution reported on the following comments by Brian Robinson, a spokesman for Republican Gov. Nathan Deal: “[T]he governor wants to understand what the ramifications could be. ‘The important part here … is we have no reason to believe there would be a disruption in funding. … There’s no scenario under which all federal funding stops immediately. … And the federal government has not told any agency that a funding disruption might come. This is all speculative.”’ He goes on to note, though, that programs like Medicaid and Peachcare – for the poor and disabled – “have really high price tags that we’d have to keep an eye on” (Sheinin, 7/28).

It’s clear is that states with large Medicaid populations are the most vulnerable. Bloomberg reported that South Carolina and four other states are at risk of credit rating cuts “because of their reliance on federal spending puts them at risk if the U.S. credit grade is lowered over the debt impasse. … Moody’s [Investors Services] said. … ‘South Carolina has a large proportion of people on Medicaid and that’s one part of the state’s profile that makes it appear potentially more vulnerable to a possible deterioration of the federal government’s credit,’ Ted Hampton, a Moody’s analyst who helps rate the state’s credit” said (Mildenberg, 7/27).

Meanwhile, WNYC reports that Democratic New York Gov. Andrew Cuomo is not making contingency plans because he believes a congressional deal “will be worked out when it has to be worked out. … Because the deadline forces resolution” (DeWitt, 7/28).

Some state officials, such as Benjamin Barnes, the secretary of Connecticut’s Office of Policy and Management, have additional worries. He says his state has enough cash on hand to weather several week’s of missed federal payments. But the Southbury Patch reports a deeper concern: “the effects of reductions to pre-established programs the federal government may make as part of an agreement. Such a deal, Barnes said, would mean that Connecticut would have to make further reductions to its current budget to plug the gap” (Moran, 7/28).